The May jobs report will dominate the stock market in the week ahead, offering possible insight into when the Federal Reserve may start tightening monetary policy and tapering the stimulus program.

The U.S. Labor Department will release the employment figures on Friday morning.

An unusual way to look at this situation within the terms of conventional investments, is that investors may wish for weaker-than-expected U.S. employment numbers next Friday -- a strong jobs report could prompt an early end to the Federal Reserve's policy of pumping money into the banking system to rescue the economy and set off the stock market's long-awaited pullback.

The Fed's loose monetary policy since the end of 2008 has kept interest rates low and propelled stocks to record highs.

There is an apparent mindset where the market seems to be very fearful of the Fed beginning a tapering, which means that those who are in the market based on easy money ... will probably exit in the week ahead if the May jobs number exceeds expectations.

The market has managed to climb this year without any substantial pullback. Concerns about the Fed's next move have increased speculation that a major bout of selling is ahead.

A stronger-than-expected jobs number in the week ahead would continue to produce the concerns we've seen manifested in the market over the last couple of days.

Economists say job gains of at least 200,000 per month over several months are needed to significantly reduce high unemployment.

The Fed has said it will keep interest rates at historic lows until the U.S. unemployment rate drops to 6.5 percent.

Employers are expected to have added 168,000 jobs to their payrolls in May, according to economists polled by Reuters. That's slightly above April's count of 165,000 new positions.

The U.S. unemployment rate is expected to hold steady at 7.5 percent in May.

It should be realized that better-than-expected jobs data would be evidence of strength in the economy, which is a positive for the market in the long run and therefore any pullback could be short-lived.

Any short-term correction would have to be opportunistic, in the sense that investors should take advantage of moving any sideline money into the equity market.

Even with the recent losses - the Standard & Poor's 500 Index (SPX) fell 1.1 percent this past week - the index rose 14.34 percent for the first five months of 2013. That gain marked the S&P 500's best first five months of any year since 1997.

THE WEEK AHEAD

”…...….In the past week, stocks fell and bond yields surged after Fed Chairman Ben Bernanke said the U.S. central bank may decide to taper its stimulus programs in the next few policy meetings if data shows the economy is gaining traction.

Stocks posted their second straight week of losses on Friday, mostly on fears that the Fed would curb its bond-buying program sooner than most people expected. This was the worst one-day drop since mid-April for the Dow and S&P 500, but major averages still logged monthly gains…..”
- The Past Week in the Stock Market – June 03, 2013

In the week ahead, the real focus of markets will be on the economics calendar and how the various reports will affect Fed policy.
Also, in the week ahead, the earnings calendar is marked by a few companies that provide us with some key reports. Discount retailer Dollar General (NYSE:DG) is expected to report first quarter results alongside Ciena Corp. (NASDAQ:CIEN) and Titan Machinery (NASDAQ:TITN).

In the week ahead, all eyes will be on key economic data both domestically and around the world and markets will be especially sensitive to the effect of these data points on Fed policy. Concerns over Fed tapering its Quantitative Easing program sent markets whip-sawing in the past week and these fears could continue in the week ahead.

Economic Predictions in the Week Ahead

• The week ahead will bring a snapshot of U.S. manufacturing activity from the Institute for Supply Management, which releases its May index on Monday. The expectation is for the ISM reading to come in at 51.7 after the 50.7 reading in April, but the strong showing by the Chicago PMI improves the odds of a positive surprise here. A strong ISM reading will be interpreted as a net negative by the market given its recent ‘Taper’ fixation.

• Monday's economic agenda also calls for April construction spending - forecast up 0.8 percent after a drop of 1.7 percent in March.

• Domestic car and truck sales for May, also expected on Monday, are projected to have increased to 15.1 million units from April sales of about 14.9 million units, the Reuters Poll showed.

• The April Trade Deficit is the only economic report on the docket for Tuesday, with expectations of an increase from March’s $38.8 billion deficit level.

• A very busy Wednesday on the economic calendar, with the May ADP jobs report and Q1 productivity readings coming out before the market’s open. Also coming out today are the Non-manufacturing ISM report for May, the April Factory Orders report, and the Fed’s Beige Book.

• The consensus expectation is for the ADP report to show 183K private sector jobs, up from April’s 119K level. A strong ADP report will set market expectations for the Friday jobs report from the government’s Bureau of Labor Statistics (BLS).

• The weekly Jobless Claims numbers coming out Thursday morning are expected to show a reversal of the prior week’s jump in initial claims.

• The May non-farm payroll report from the government’s BLS is the highlight for Friday and will set the tone for the stock market not just for today, but also for the week ahead. The expectation is for a ‘headline’ tally of 175K jobs after April’s 165K tally. A strong jobs report will be a negative for the market.

Jobs reports through the first half of 2013 have been generally positive, averaging about 200,000 jobs created per month. But the path has been choppy as evidenced by the March report that revealed just 88,000 new jobs added to the economy, a figure that was later revised upward.

The unemployment rate currently stands at 7.5%, a four-year low.

A solid May report, due in the week ahead, could prompt more chatter from Federal Reserve Board members that it’s time to taper off the Fed’s $85 billion in bond purchases each month.

The debate over when and how to start scaling back that program, called "Quantitative Easing (QE3)", has pitched back and forth with each new jobs report. When the report is positive, some Fed board members who oppose the stimulus argue it’s time to cut back on QE III. When the report is less robust, other Fed board members who support the program use the data to justify maintaining the bond purchases at their current level.

Many analysts believe QE III has acted as an artificial stimulant for the recent stock market surge and that when the Fed cuts off the program it will mean the end of the current bull market.

The spread between the S&P 500 dividend yield and the 10-year U.S. Treasury note's yield this past week hit its narrowest in about a year. The S&P 500 dividend yield was at 2.39 percent, while the 10-year note's yield hit 2.235 percent during the week.

By comparison, the dividend yield on the utilities sector stands at about 4 percent.

The move out of dividend-paying and other defensive shares should continue as the economy improves, though the market is still a "long way" from seeing high interest rates.

The Q1 earnings season is effectively over and we still have a few more weeks to go before the next reporting cycle gets underway.

However, a handful of 2013 Q1 results are still to be reported and quite a few of those will come out in the week ahead. These include Dollar General (DG), VeriFone (PAY), J.M. Smucker (SJM), Hovnanian Enterprises (HOV) and others. We will get Q1 results from 51 companies in total and 4 S&P 500 members in the week ahead. We are nearing the end point of Q1 earnings season and just a couple of weeks away from the point when the Q2 earnings season gets underway with reports from Discover Financial (DFS) and Oracle (ORCL) on June 17th.

Expectations for the 2013 Q2 earnings season have come down, with total earnings in the quarter now expected to be up +0.9% on -0.7% lower revenues. This is a drop from the +3.9% total earnings growth expected in Q2 on +0.5% higher revenues in early April. Total earnings were up +2.8% in Q1 on barely positive growth in revenues.

The Finance sector is expected to rebound strong in Q2, with total earnings for the sector expected to be up +19.1% from the same period last year after the +7.7% total earnings growth in Q1. The recent uptrend in long-term interest rates following the ‘Taper’ buzz has improved the operating backdrop for the sector quite a bit, with earnings estimates for the sector moving up. As you can see in the ‘revisions ratio’ charts below, the revisions trend is decidedly in the positive category for the sector.

Expectations for full-years 2013 and 2014 have come down far less than what we have seen for Q2 estimates. In fact, it is reasonable to assume that given the improving outlook for the Finance sector; aggregate estimates will start rising after a very long time in the coming weeks.

The +6% growth in total earnings this year, down from +6.8% in early April, reflects a material ramp up in the second half of the year that is then expected to carry into 2014. Combining the actual results for Q1 with estimates for Q2 gives us +1.8% year over year growth in total earnings in the first half of 2013. But total earnings are expected to be up +9.5% in the second half of the year and a further +11.5% in full-year 2014.

Earnings Estimate Improving

The revisions trend has started moving in a positive direction, with more earnings estimates going up instead of down. Even accounting for the typical seasonal behavior of revisions activity which peaks during earnings seasons and tails off after the season is over or close to over, the emerging trend in revisions appears significant.

The charts below show trends in earnings estimate revisions. The key metric in all the charts is the ‘revisions ratio,’ which is the ratio of total number of upward revisions over the preceding four weeks to the total number of revisions (positive and negative) over that same period. There are two charts for each year -- 2013 and 2014. The bar charts show the current state of the ‘revisions ratio’ (as of 5/24/13), while the line charts plot the ratio’s trajectory over the preceding 24 months.

The ratio doesn’t tell you the ‘magnitude’ of the revisions, only the direction. The ‘50%’ level (the dark line) is the dividing line between positive and negative trends, with readings above 50% implying more positive than negative revisions. The analysis shows that readings between 45% and 55% don’t offer material insights into the magnitude of revisions. It is only readings above 55% and below 45% that offer bullish and bearish signals about the magnitude of earnings revisions.

As you can see in the charts above, the revisions trend for the S&P 500 as a whole is still in neutral territory though moving in the right direction. But see the fast emerging positive trend in the Finance sector for both this year and next (the green line). The sector’s revisions ratio currently (as of 5/24) stands at 72%, by all means bullish territory. This pronounced positive bias is at play for many industry players that are experiencing positive estimate revisions, including J.P. Morgan (JPM), Wells Fargo (WFC), Fifth Third Bank (FITB) and many others.

Finance Sector and Interest Rates in the Week Ahead

The trend makes perfect sense as higher interest rates may be a hindrance for other industries, but it’s beneficial for the Finance sector’s earnings. Flat net-interest margins have been a permanent feature of the sectors -- particularly banking -- earnings picture in recent quarters. The charts also show the trend in the Technology sector, the largest in the S&P 500, to spotlight Finance’s improving outlook.

The Finance sector’s positive earnings outlook is a function of the rising trend in interest rates. But whether that trend continues or reverses course in the coming days will depend to a large extent on economic data in the week ahead, particularly Friday’s May non-farm jobs report. A positive jobs report on Friday will significantly increase the odds of a ‘Taper’ announcement in the coming FOMC meeting.

Discount retail chain Dollar General Corporation (NYSE:DG) is expected to report its first quarter operations on Tuesday, June 4. Analysts expect the company to report earnings per share of $0.71 vs. $0.63 on revenue of $4.24 billion vs. $3.9 billion a year ago. Importantly, Dollar General could comment on the state of consumer spending in the economy as its sales are sensitive to tax refunds, which were issued late this year, as well as tax rates, which increased in the first quarter.

Analysts at Wedbush expect a largely positive report next week as they maintain an outperform rating on the stock. “There is no specific guidance for Q1, but the company expected 2013 EPS of $3.15-$3.30 with comps up 4%-6%. Management expected gross margins to contract at a rate higher than the rest of the year due to anticipated higher shrinkage, higher markdowns, and lower markups, which are mostly due to the impact of higher tobacco sales. However, gross margin erosion was expected to moderate during the rest of the year.”

“We forecast Q1 EPS of $0.70 vs. $0.63 with comps of +2.5% vs. +6.7%; consensus is at EPS of $0.71 with comps of +2.5%. When it reported Q4 results on 3/25, management noted that QTD weather had been unusually cold (and we saw little improvement by the end of the quarter). However, management expected some eventual benefit from what it estimated as $18 billion in delayed tax refunds.”

Bank of America Merrill Lynch also views the company positively ahead of its earnings release, having increased its price target on the stock to $60 from $55 earlier this month. The analysts at BAML have a buy rating on Dollar General.

“We are upgrading Dollar General to Buy from Neutral and raising our PO to $60 from $55, representing 18x 2013 P/E (16x 2013 prior), while maintaining our above- guidance 2014E EPS of $3.35. With DG's recent credit rating upgrade, debt refinancing and near lifting of the private equity overhang, we expect sentiment toward the name to continue to strengthen, particularly as DG outperforms Family Dollar on comps, margins and EPS growth over the coming quarters.”

“Despite near-term margin and comp headwinds (1Q13 faces a tough compare), we think DG's longer-term prospects remain compelling: 6-7% square footage growth, 3-5% comp, operating margin expansion and growing capital return. The initiation of a dividend in the future would also be a positive catalyst. Strategy and execution remain very solid, and we expect continued remodels, new services and cooler door expansion to increase relevancy and ticket.”

Ciena Corporation in the Week Ahead

Communications equipment maker Ciena Corporation is also expected to report earnings in the week ahead. On Thursday, Ciena is expected to report a second quarter loss per share of $0.01 vs. earnings per share of $0.04 a year ago. Revenue is expected to grow to $483.34 million from $477.62 million a year ago.

Morgan Stanley has an equal-weight rating on the stock heading into earnings. They have a base case target price of $18 on the stock but see the price target rising to $25 in the bull case should margins expansion accelerate and the corporate investment cycle picks up.

“We believe Ciena has increased visibility on revenue this year and next, as it is now feeling the full weight of the North America capex upgrade cycle. High margin products are beginning to grow; although mix remains volatile, product gross margin now has the potential of hitting the mid-40's vs our prior thesis that it remains at best 40-42% giving us more confidence in a higher normalized LT operating margin.”

“We are remaining Equal-weight as in the near-term, gross margin falls again next quarter, while opex goes back up creating continued margin volatility. In addition, we believe revenue and EPS growth remains lumpy, as new deals are large and the timing of revenue recognition is difficult to predict.”

Titan Machinery in the Week Ahead

Lastly, construction equipment retailer Titan Machinery is expected to report first quarter results on Thursday as well. The company is expected to report quarterly EPS of $0.19 vs. $0.36 a year ago on revenue of $479.98 million vs. $421.72 million a year ago.

Notably, the company lowered quarterly guidance in late May and analysts reacted to this change. The company attributed the weaker operations in the quarter to the colder than expected weather postponing purchases of equipment.

Analysts at M Partners commented on the preliminary operations and the full quarterly report. “For Q1/F14, Titan expects fully diluted EPS will be between a loss of $0.01 and a loss of $0.03. We were expecting fully diluted EPS of $0.22 in Q1/F14; consensus was $0.18. The consensus range of EPS estimates is $0.13 to $0.22.”

“Titan expects revenue in Q1/F14 to be $440.0 million. We were expecting revenue of $480.4 million in Q1/F14 (consensus was $478.3 million), up from $421.7 million in Q1/F13 with about half of the revenue increase stemming from acquisitions made in the 12 months ending April 30, 2013.” M Partners expects a loss of $0.03 per share for the quarter following the guidance.

Piper Jaffray also cut estimates after the guidance came out and commented on the stock ahead of earnings. “We are lowering our estimates following management's below consensus 1Q14 pre-release and downward revision to FY14 EPS guidance. As we expected, Titan's April ending quarter was negatively impacted by the late spring in both agriculture and construction. Management expects 1Q revenue of $440 mil and an EPS loss in the range of ($0.03) – ($0.01), both falling below our previous street low estimates.”

“Our FY14 EPS estimate of $1.82 is near the midpoint of management's revised guidance range of $1.70 - $2.00, which is down from the previous range of $2.00 - $2.30. We are also lowering our FY15 EPS estimate to $2.09 on continued difficulties in the construction segment and a shift in mix of lower margin sales.”

“Price target drops to $21; Neutral. We are applying a lower valuation multiple of 10x CY14 (11x prior) as we believe shares of TITN will trade more in-line with the peer group multiple. With expectations that 97+ mil acres of corn will get planted in time and minimal visibility into improvements in construction we do not see any catalysts in the near-term that will expand valuation multiples.”

Cyclical stock has outperformed defensives in recent weeks as investors bet the U.S. economy is on firmer footing. The week ahead could be a test, particularly with the May jobs report on Friday.

Over the past month, cyclicals led by the financial sector have outperformed defensives like telecoms and utilities as well as the broader market.

The financials and industrials sectors gained 6 percent and 5 percent, respectively, in May while the utilities, telecoms and consumer staples sectors all posted steep losses. The S&P 500 gained just 2 percent, after logging a 1 percent drop on the final trading day of the month.

Traders suggested that the "Hindenburg Omen”, an ominous technical sign that seems to pop up every few years and can signal a major market tumble, was at play in the late-day selloff on Friday. The MSCI indices, widely followed benchmarks, were also rebalanced which may have led to some portfolio repositioning heading into the close.

A number of equity strategists are also advocating investors take a cyclical tilt in their portfolios.

Good economic data should continue to support cyclical stocks. And the market will have plenty of it to consider in the week ahead to help better determine just how strong the U.S. economy is.

The past week makes it feels as if this is the beginning of the correction -- there are also some fears about the months of June. Also, there's uncertainty over Japan, uncertainty over the pace of QE, and we've got investors that have already seen some healthy gains this year.

June is one of the worst months on average for the stock market, down an average of 0.1 percent.

According to the trading adage, the market performs best in the six months from November through April, and worst in the period from May through October.

Obviously all eyes remain on the U.S., analyzing every piece of data to establish if, and when, stimulus measures will be withdrawn—with every piece of bad news being actively welcomed by the market. This inverted logic is unsustainable in the long term, but for the moment, as the withdrawal of liquidity is perceived as being more painful than an economic slowdown, investors are happy to live in this bubble for as long as they can.

The following are catalysts concerning the stock market direction in the week ahead:-

1. On Sunday night we will get a key number out of China -- the non-manufacturing PMI. Expect the numbers to be disappointing, but if we get one good number from China with the mineral stocks are so low that they could blossom.

2. Monday presents a strong chance for a rally with the Eurozone PMI Manufacturing coming out Monday morning. If the number doesn’t go down too much versus the previous month a rally is very possible.

3. Tuesday may present some headwinds for market progression particularly when Dallas Fed President Fisher speaks on monetary policy in Toronto -- he's known as a real hawk so expect him to say that the Federal Reserve should be much less accommodative. This will present a problem for the bulls, so be prepared for an upset Wednesday morning.

4. Also Tuesday, Dollar General is scheduled to release earnings. The dollar stores have been the beneficiary of the explosion in the number of people who use food stamps, and therefore expect a very good number from DG.

5. Information out of conferences being held by many major investment banks -- the Bank of America Merrill Lynch Global technology conference and to the JP Morgan Diversified industries conference -- may provide clues as to which companies may prosper in the second half as business improves and revenues start to flow.

6. On Wednesday jobs will take center stage with the ADP employment number. Many investors consider it to be a precursor to the Friday report released by the government; however it's not uncommon for there to be a divergence between the two. Because jobs are so important to this market it would be important that you ignore this number entirely and only focus on Friday.

7. Brown-Forman, the maker of Jack Daniels, reports earnings Wednesday. This should be a very good number, but it might not be good enough as this is the kind of consumer staple stock this market has turned on!

8. Also the apparel company, Ascena Retail reports. This stock has quietly moved up to above $20. With that exceptional rally be careful, the company better not disappoint or it may back-track to $18 very quickly.

9. Bulls could face serious headwinds on Thursday, with Philly Fed President Charles Plosser scheduled to speak in Boston. Plosser continues to concern his talks about inflation – which short-sellers like. In other words, the Street may take his comments as a sign that the Fed is about to pull back from its bond buying program. His 8 a.m. talk will probably send the market lower!

10. Also, on Thursday, there's an ECB meeting – maybe a discussion about the second rate hike the Europeans put through when Trichet thought Europe was about to grow is on the agenda -- which could propel or repel the market rally.

11. Perhaps no day matters more in the week ahead than Friday; the government will release the jobs report. The consensus right now is for 7.5% unemployment and 170,000 jobs created.

The concern by many investors is that good news may be bad news for stocks. If the number comes in better than expected -- 200,000 jobs created -- the Street may fear the Fed is about to pull back. If that's the case, expect stocks to drop dramatically!

The American Association of Individual Investors (AAII) reported that bullishness—expectations the market will rise over the next six months -- last week fell a full 13 percentage points to 36 percent, while bearishness rose to 8.1 percentage points to 29.6 percent. Neutral sentiment gained 4.9 percentage points to 34.4 percent.

The Investors Intelligence survey, which polls newsletter editors, remained optimistic though slightly less so, with bulls outnumbering bears 52.1 to 19.8 percent.

The daily chart of the NYSE Composite clearly shows the key reversal on May 22 and the close below the prior week's low. The daily Starc band is now at 9261, which corresponds to the April highs (line a).

The short-term uptrend (line b) is now at 9,026, with the 38.2% 'Fibonacci Support’ from the November 2012 lows at 8,928. The 50% support is at 8,729, which is just above the March lows at 8,700.

The major 38.2% Fibonacci retracement support from the 2011 lows is at 8,441, which is more than 10% below current levels, and also corresponds to the uptrend (line b).

The daily NYSE The weekly NYSE Advance/Decline (A/D) line dropped below its WMA on May 23, and is now starting to accelerate to the downside. The daily WMA is now starting to roll over, which is consistent with the top-building process. Its uptrend (line c) may be broken in the week ahead before stocks try to rebound.

The summer months are often a difficult time for investors, and June is generally a flat month. Since 1950, the S&P has closed up 32 years and down 31. July is a bit better, and August is a bit worse.

The plunge late Friday is what many have been expecting for several weeks – this is also a strong sign from the markets that now is the time to get your house in order – in other words become more diversified, become exposure conscious – maybe adjust stocks and/or look at adding options cover – be agile to market conditions!

Stocks have been in the sweet spot for quite a while, but there is a fear that this is about to change.

However, with this change, there will be some good buying opportunities in the week ahead due to catalysts, outlined above, creating a certain amount of trepidation in regard to the market direction. The common saying at the moment seems to be “good news is bad news”, which applies to many investors.

In other words, as economic data comes out, if it suggests the economy has continued to improve, it could trigger substantial selling. On the surface, that seems counterintuitive; a good economy is good for business. And it is, over the long-term.

But in the near term big money investors will interpret positive economic data as sign that the Federal Reserve is about to pull back economic stimulus rather than risk runaway inflation.

Therefore, this would appear that any piece of data that indicates an accelerating economy will send all stocks tumbling – so be prepared.

However, that doesn't mean there isn't opportunity, you just need to be strategic. There will be stocks worth buying, which means that they will be different from the ones that you normally purchase.

Most importantly, have a plan and stick to it, so you will not have to make rash decisions when the market is going against you.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
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Options traders win because they are successful.